arens14e ch18 ppt ge

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 5 - 5

Audit of the Acquisition and Audit of the Acquisition and Payment Cycle: Tests of Payment Cycle: Tests of

Controls, Substantive Tests of Controls, Substantive Tests of Transactions, and Accounts Transactions, and Accounts

Payable.Payable.

Chapter 18Chapter 18

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 18 - 18 - 22

Learning Objective 1Learning Objective 1

Identify the accounts and the classes Identify the accounts and the classes of transactions in the acquisition and of transactions in the acquisition and payment cycle.payment cycle.


Transactions in the Transactions in the Acquisition and Payment Acquisition and Payment

CycleCycleThree classes of transactions: 1. Acquisitions of goods and services

2. Cash disbursements

3. Purchase returns and allowancesand purchase discounts


Accounts in the AcquisitionAccounts in the Acquisitionand Payment Cycleand Payment Cycle



Describe the business functions and Describe the business functions and the related documents and records in the related documents and records in the acquisition and payment cycle.the acquisition and payment cycle.


Classes of TransactionsClasses of Transactionsand Accountsand Accounts

Inventory Property, plant, and equipment Prepaid expenses Leasehold improvements Accounts payable Manufacturing expenses Selling and administrative expenses

Acquisitions:


Classes of TransactionsClasses of Transactionsand Accountsand Accounts

Cash in bank (from cash disbursements) Accounts payable Purchase discounts

Cash disbursements:


Business Functions in the Business Functions in the CycleCycle

Receiving Goods and Services

Processing Purchase Orders

Recognizing the

Liability

Processing & Recording

cash disbursement

s


Related DocumentsRelated Documentsand Reportsand Reports

Processing purchase orders:Purchase requisitionPurchase order

Receiving goods and services:Receiving report



Recognizing the liability:

Vendor’s invoice

Debit memo

Voucher

Acquisitions transaction file



Recognizing the liability:

Acquisitions journal or listing

Accounts payable master file

Accounts payable trial balance

Vendor statement



Processing and recording cash disbursements:Check

Cash disbursements transaction file

Cash disbursements journal or listing



Understand internal control, and Understand internal control, and design and perform tests of controls design and perform tests of controls and substantive tests of transactions and substantive tests of transactions for the acquisitionfor the acquisition

and payment cycle.and payment cycle.


Methodology for Designing Methodology for Designing Controls and Substantive TestsControls and Substantive Tests

Understand internal control –acquisitions and cash disbursements

Assess planned control risk –acquisitions and cash disbursements

Determine extent of testing controls

Audit procedures

Sample size

Items to select

Timing

Design tests of controls andsubstantive tests of transactions

for acquisitions and cashdisbursements to meet

transaction-related audit objectives


Understand Internal ControlUnderstand Internal Control

Study the client’s flowcharts

Review internal control questionnaires

Perform walk-through tests


Assess Planned Control RiskAssess Planned Control Risk

Authorization of purchases

Separation of asset custody fromother functions

Timely recording and independentreview of transactions

Authorization of payments


Determine Extent of TestingDetermine Extent of Testingof Controlsof Controls

The auditor identifies the key internal controlsand weaknesses and assesses control risk

The auditor performs tests of controls to obtainevidence that controls are operating effectively


Controls and Substantive TestsControls and Substantive Testsof Transactions for Acquisitionsof Transactions for Acquisitions

Recorded acquisitions are for goodsand services received (occurrence)

Existing acquisitions are recorded(completeness)

Acquisitions are accurately recorded(accuracy)


Controls and Substantive TestsControls and Substantive Testsof Transactions for Acquisitionsof Transactions for Acquisitions

Acquisitions are correctly includedin the master files (posting andsummarization)

Acquisitions are correctly classified(classification)

Acquisitions are recorded on thecorrect dates (timing)


Attributes SamplingAttributes Sampling

Because of the importance of tests of controlsand substantive tests of transactions foracquisitions and cash disbursements, the useof attributes sampling is common in thisaudit area.


Important Differences Important Differences Compared to other CyclesCompared to other Cycles

Acquisitions and Payments Cycle transactions:

Larger number of transactions

Significant judgment

Wide range of dollar amount



Describe the methodology for Describe the methodology for designing tests of details of balances designing tests of details of balances for accounts payable using the audit for accounts payable using the audit risk model.risk model.


Identify client businessrisks affecting

accounts payable

Methodology for Designing TestsMethodology for Designing Testsof Balances for Accounts Payableof Balances for Accounts Payable

Set tolerable misstatementand assess inherent risk

for accounts payable

Assess control risk forthe acquisition and

payment cycle

Phase I

Phase I

Phase I



Design and performtests of controls and

substantive testsof transactions

for the acquisitionand payment cycle

Phase II


Timing

Items to select

Sample size

Audit procedures


Design and performanalytical procedures

for accountspayable balanceDesign tests of

details of accountspayable balance to

satisfy balance-related audit

objectives

Phase III

Phase III



Design and perform analytical Design and perform analytical procedures for accounts payable.procedures for accounts payable.


Analytical Procedures for the Analytical Procedures for the Acquisition and Payment Acquisition and Payment

CycleCycle

Review list of accounts payable for unusual, nonvendor, and interest-bearing payables

Classification misstatement for nontrade liabilities

Analytical procedure

Compare acquisition-related expense account balances with prior years

Misstatement of accountspayable and expenses

Possible misstatement


Analytical Procedures for the Analytical Procedures for the Acquisition and Payment Acquisition and Payment

CycleCycleAnalytical procedure

Compare individual accounts payable with previous years

Unrecorded or nonexistent accounts, or misstatements

Calculate ratios, such aspurchases divided by accounts payable, and accounts payable divided by current liabilities

Unrecorded or nonexistent accounts, or misstatements

Possible misstatement



Design and perform tests of details of Design and perform tests of details of balances for accounts payable, balances for accounts payable, including out-of-period liability tests.including out-of-period liability tests.


Out-of-Period Liability TestsOut-of-Period Liability Tests

Examine underlying documentation forsubsequent cash disbursements

Examine underlying documentation for billsnot paid several weeks after the year-end

Trace receiving reports issued beforeyear-end to related vendors’ invoices


Out-of-Period Liability TestsOut-of-Period Liability Tests

Trace vendors’ statements that show a balancedue to the accounts payable trial balance

Send confirmations to vendors with whomthe client does business


Cutoff TestsCutoff Tests

Relationship of cutoff to physical observation of inventory Inventory in transit

FOB destinationFOB origin



Distinguish the reliability of vendors’ Distinguish the reliability of vendors’ invoices, vendors’ statements, and invoices, vendors’ statements, and confirmations of accounts payable as confirmations of accounts payable as auditaudit

evidence.evidence.


Reliability of EvidenceReliability of Evidence

Distinction between vendors’ invoicesand vendors’ statements

Difference between vendors’ statementsand confirmations


Accounts Payable Accounts Payable ConfirmationConfirmation


Sample SizeSample Size

Sample sizes for accounts payable tests varyconsiderably, depending on many factors.

Statistical sampling is less commonly usedfor the audit of accounts payable thanfor accounts receivable.


Types of Audit Tests for theTypes of Audit Tests for theAcquisition and Payment Acquisition and Payment

CycleCycle

TOC + STOT + AP + TDB= Sufficient appropriate evidence per GAAS

Cash inBank

AccountsPayable

AcquisitionExpenses

Payments Expenses

Audited byTOC, STOT, and AP

Endingbalance

Endingbalance


Audited byAP and

TDB

Auditedby AP and

TDB


Types of Audit Tests for theTypes of Audit Tests for theAcquisition and Payment Acquisition and Payment

CycleCycle

TOC + STOT + AP + TDB= Sufficient appropriate evidence per GAAS

AccountsPayable

AcquisitionAssets

Acquisitionof assets

Endingbalance


Audited byAP and

TDB

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 5 - 5

End of Chapter 18End of Chapter 18